The Portfolio Thermostat's Indicators are Showing a Volatility Increase

Posted on January 12, 2015

Canterbury Portfolio Thermostat Weekly Update 1/12/2015

Market State 2 (13 days) Long Term (Bullish) Short Term (Neutral)

The Canterbury Volatility Index (CVI 72): The CVI increased 7 points last week (a 10.7% increase). The CVI is now at the highest level since June 24, 2013 (CVI 73). Last week’s increase in volatility is just a little disconcerting. We may need more time to see if the increasing volatility persists and causes a rotation into new areas that could benefit from a new market environment.

Overbought/Oversold indicator is 61% oversold (Neutral). There was virtually no change from the previous week’s 65% oversold reading.

S&P 500 Index

Market Comment:

As it stands today, US Equities continue to dominate the top of the Portfolio Thermostat’s Volatility Weighted Strength indicator. Growth stocks are outperforming value stocks (Bullish sign).

The New Year has gotten off to a bit of a rough start. Year to date, there are no major global equity indexes in positive territory. That said the Portfolio Thermostat is actually up year to date and it closed last year with a strong 4th quarter.

A quote from the last Weekly Update: Canterbury has performed extensive evidence based research that provided statistically relevant data showing that shifts between Bull and Bear markets have not occurred without prior warning. In other words, a shift between a Bull and Bear markets is a process, not an event.

Bull and Bear markets are about the predictability of risk, not the predictability of upside appreciation. Bull markets can and will have normal corrections and periods of sideways consolidation. That said most money that is made is produced by holding securities that are in Bull Market States and low or decreasing volatility.

Canterbury’s evidence based studies show that difficult market environments typically begin with an increase in volatility. Time will tell if the latest CVI increase will turn into something more substantial. For now, the risk appears to be limited.

Long term success in investing requires effective risk management. The Portfolio Thermostat model will only hold ETF positions that display Bull market characteristics. In the event that volatility continues to pick up and the market’s leadership begins to shift to new areas, then some of our existing holdings will begin to issue Sell signals. The ETFs sold will be replaced with new positions that display Bull market characteristics as defined by our Security State rankings.

Bottom Line:

All markets compete for investors’ dollars. Every market class and traded security will experience both Bull and Bear market environments. It will be interesting to see if we begin to see more Buy signals within our universe of 50 plus “Alternative” ETFs. Currently the model only holds 3 Alternatives ETFs out of 13 positions.

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.